What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Cadence Design Systems' (NASDAQ:CDNS) trend of ROCE, we liked what we saw.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Cadence Design Systems:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.19 = US$1.5b ÷ (US$9.0b - US$1.3b) (Based on the trailing twelve months to March 2025).

So, Cadence Design Systems has an ROCE of 19%.  In absolute terms, that's a satisfactory return, but compared to the Software industry average of 9.9% it's much better.

Check out our latest analysis for Cadence Design Systems NasdaqGS:CDNS Return on Capital Employed May 20th 2025

In the above chart we have measured Cadence Design Systems' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Cadence Design Systems .

So How Is Cadence Design Systems' ROCE Trending?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 19% and the business has deployed 180% more capital into its operations. 19% is a pretty standard return, and it provides some comfort knowing that Cadence Design Systems has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, Cadence Design Systems has done well to reduce current liabilities to 14% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

To sum it up, Cadence Design Systems has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 272% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Story Continues

Cadence Design Systems could be trading at an attractive price in other respects, so you might find our  free intrinsic value estimation for CDNS on our platform quite valuable.

While Cadence Design Systems isn't earning the highest return, check out this freelist of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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